Zayo Group Holdings (ZAYO) Q3 2018 Results - Earnings Call Transcript

Zayo Group Holdings, Inc. (NYSE:ZAYO) Q3 2018 Earnings Call May 3, 2018 5:00 PM ET

Executives

Brad Korch - Zayo Group Holdings, Inc.

Dan P. Caruso - Zayo Group Holdings, Inc.

Matt Steinfort - Zayo Group Holdings, Inc.

Analysts

Michael I. Rollins - Citigroup Global Markets, Inc.

Amir Rozwadowski - Barclays Capital, Inc.

Colby Synesael - Cowen and Company

John C. Hodulik - UBS Securities LLC

Simon Flannery - Morgan Stanley & Co. LLC

Jonathan Atkin - RBC Capital Markets LLC

Philip A. Cusick - JPMorgan Securities LLC

Operator

Thank you for standing by and welcome to Zayo Group Holdings Fiscal Year 2018 Third Quarter Earnings Call. My name is Austin, and I will be your operator today. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded Thursday, May 3, 2018.

I will now turn the conference over to Brad Korch.

Brad Korch - Zayo Group Holdings, Inc.

Good afternoon and thank you for joining. Today's call will be led by Zayo's Chairman and Chief Executive Officer, Dan Caruso; and Chief Financial Officer, Matt Steinfort.

This call is being webcast with a slide presentation that reviews the key financial and operating results for the three months ended March 31, 2018. For a link to the webcast, please visit the Investor Relations section of the Zayo website www.zayo.com. The slide presentation and earnings release are directly available on the site.

Please turn to page 2 of our earnings call presentation while I review our Safe Harbor statement. Statements made in this call and contained in the earnings materials available on our website that are not historical in nature may constitute forward-looking statements. Such statements are based on the current expectations and beliefs of management.

Actual results may differ materially from these forward-looking statements due to risks and uncertainties that are described in more detail in our filings with the SEC. We undertake no obligation to publicly update or revise these forward-looking statements except as required by law.

I will now turn the presentation over to Dan Caruso, our Chairman and Chief Executive Officer.

Dan P. Caruso - Zayo Group Holdings, Inc.

Thanks, Brad. We put out a press release a little while ago relative to the resignation of our COO Andrew Crouch. We will, I'm sure, have more discussion about that in the Q&A part, one thing I want to share that the both the performance of the company and the trajectory of the company had no influence whatsoever and that's not related to the Andrew's departure.

So with that let's talk about the quarter. We had a record quarter both from a net booking standpoint at $9.5 million and a gross installs standpoint at $8.1 million, so not just records but really nice strides forward relative to our long-term outlook. Churn declined slightly to $5.8 million. Our net installs were strong by comparison to the last several quarters and implied a 5% organic growth rate and we'll talk a little more about that. There is 7% annualized revenue growth.

We're going to talk a lot about EBITDA later on in the presentation. EBITDA is lower than it was in the prior quarter for our Communication Infrastructure, we're going to share with you a bridge and how we got there and some expectation about what to look forward to relative to this in the future.

EBITDA margins continue to be strong at 55% and we have very strong unlevered free cash flow. We'll talk more about that as well. The recent tuck-in acquisitions that we've done Spread Networks, Optic Zoo, Neutral Path are all really interesting kind of right up the middle of the fairway acquisitions by Zayo and we're off to really strong starts in all three cases.

We'll have a lot of conversation about REIT. We put out a press release, we've made meaningful progress there and the planned divesture of the ILEC property demonstrates the progression of what we're doing with Allstream.

So flipping the slide let's look at how our net installs compared to our 6% to 8% growth target, at $2.3 million we came in just below the low end of the 6% to 8% range. With $9.5 million of net bookings being well in advance – well ahead of the $8.5 million target that shows that we also have momentum to continue to grow both our gross installs and our churn would continue till we have upside relative to where the churn came in.

During the quarter, we largely completed our transition to verticals. The transition started during the course of last year, but really took full course in the month of January. We have sales executives responsible for each of these global medical verticals. It's given us an improved understanding of the opportunities in each vertical, but also increased credibility and just some higher quality conversations with the customers.

So we're in place now, there was as you would expect during the organization some things we had to get through. So it may have cost us a little bit momentum during the quarter but our sales results being at a record showed that we're selling effectively even as we're going through these last phases of change that have been underway over the last year or so.

We do look at turning pages that the sales investment is a bit of baking in the oven. We've ramped up our sales force and also rebuilt our sales leadership. Now a lot of the building up of our sales leadership has been through internal promotion, but there's also been some new key additions involved, some of which are relatively new to Zayo and getting up the learning curve. When you take into account the fact that a lot of the investment we made is still kind of getting their sea legs completely under them, we see that there's a lot of opportunity to do more with the number of people that we currently have. So we think that's another form of momentum.

We've talked a lot in recent quarters about our Fiber Solutions business, about our approach there, it's the largest business that we have. The momentum there is particularly strong. We had an outstanding sales quarter of $3.8 million there and we had a real strong gross installs of $2.6 million, now the difference between those two is the implied momentum to continue to support the gross installs being at or above these levels in the future. And the net installs implied a 9% growth rate, again, if you carry forward the difference between net booking and gross installs, implies that there's upside to the growth rate beyond this 9%. So, very pleased here, also want to note that this is also – while growing effectively, this is also a very strong cash flow producing business. So it's getting the best of both worlds, produces a lot of cash and has a lot of growth.

Part of what led to the increased momentum is what we've talked about over the past, at least year, that transition that we've made into the regions. So breaking the Fiber business down into six discrete regions, each region of which has a leader that has broad responsibility for the performance of that region including, the engineering resource, the construction resource, but also a business development function, so they're a direct part of the sales effort, all with the goal of creating value and creating growth of assets that we have in the region.

So this change has been kind of gradual over a number of quarters, but it's really having the effect that we intended and hoped for. We also see an opportunity to grow this further by further investing in the business development resources. We think we could put about 40% more resources to work in order to get even more focused on each of the geographies where we have significant fiber plan. It's a great complement to our direct sales force. They work collaboratively together from a Fiber Solutions standpoint kind of working from the ground up and a sales standpoint working across verticals.

So the sales investments and the strong market demand together are creating a lot of momentum. If you look at each of the verticals, it was a strong quarter, particularly strong in the public enabled by the E-Rate process, of which a lot happened in the first quarter, but more will happen in subsequent quarters as well. But we're seeing broad-based demand across each of the verticals. And even though, we've had the expected disruption within the sales force as we've gone through change, we have effectively been growing sales every quarter while we've been preparing ourselves for the next two, three, four years. So everything there is reason to be positive.

Further reason to be positive on next slide is not only did we sell more, but the quality of the sales was very strong. If you look at it from the perspective of how much we sold that has less than 12 month payback, that was a record. If you look at the combination of positive IRR, whether it's less than or more than 12 months that also was a record and we had a similar level of sales associated with speculative projects, which is very small. So not only do we sell lot more but we did it in the form of very high quality strong return projects.

Further illustrating that is on slide 12 if you compare the contract value with the capital it's going to take to turn this up and the payback cycle, all very strong attributes. Again speaking to the quality of the sales that we did and the effect it has in leveraging our network investment.

We shared via press release the momentum we had with E-Rate, this is by far our best E-Rate year even though it's only the first quarter of the year, doing double what we did all of last year. Now in part, that's because the first quarter this year is a particularly important quarter, but there is a material amount of additional E-Rate opportunity that will show up in subsequent quarters during the year.

We also announced a large mobile infrastructure win as part of the quarter, we know subsequent to this, there's obviously been the announcement between two of the large wireless carriers, that does not effect this deal, that does not result in this deal that we did being in any way kind of impacted by it. It does display the power of the second tenant economics as you look at from the – our overall payback period on the new sales, part of the reason that it was a very strong profile is this deal was geared toward leveraging fiber plant that is largely already in place.

Moving on to gross installs, again, a record quarter, continuing the momentum for the last few quarters. We also feel like we continue to have momentum so our expectation is this number will continue to grow. And obviously we can't look out many quarters but we can look out in the shorter term, we expect to see continued growth in this number in the very near-term quarters, meaning that we're very close to the $8.5 million threshold, but we think we'll be even closer and perhaps above it as we look at the quarter we're in right now.

We saw modest churn improvement. Now, we think we still have more opportunity here. We think we still have an opportunity to kind of execute better around churn. We have a lot of activity going on within the company, we'll talk a little bit about that, that has started to take a positive effect on this. But we do believe we have more opportunity to see this number get shaved down a bit further. We still think $5.5 million or less is a reasonable target.

So the net installs on a cusp of the 6% to 8% growth coming in at 5%, again, we anticipate continued momentum in the June quarter. So we expect the 2.3% to be a short-term record.

From a revenue standpoint, revenue grew by 7%, 5% of which was organic meaning the other 2% came from the inorganic deals that closed during the quarter. So the revenue growth was in line with what the net installs performance has been in the recent quarters. EBITDA was largely flat quarter-over-quarter, after adjusting for the bankruptcy that we talked about last quarter. We'll talk more about why it was flat and has posted continuing pace with the revenue in Matt section.

From a cash flow standpoint, very strong quarter, the capital that we spent and the net capital were very strong numbers. The adjusted unlevered free cash flow was by far a record, and the levered free cash flow was a record as well. So while we've been growing the business, we're also converting a lot of our EBITDA into cash, not by design if we have an opportunity to invest further in projects and opportunities that we feel we're comfortable with, we will continue to do so, but the results for the current period are such that we've been able to produce cash while growing the business.

So as we're nearing our 6% to 8% growth target, the question we ask ourselves and the question that we've shared at times with – in previous calls and public communications is, what's so magic about 6% to 8% is that, that kind of where this business should be growing at. Question we ask ourselves is, hey, we got to get to 6% to 8%, but is the higher number viable, is 8% to 10% viable is next threshold. And one thing I think we all have grown to appreciate is, so long as your churn is in a good spot, the difference between a 4%, 6% and 8% growth rate, that means you just have to sell a bit more, turn that into installs and keep the churn at about the levels it is, and the growth rate will move pretty materially from a net installs standpoint.

So given that we're under cusp of getting to that 6%, what we're doing internally here and have been for the last couple of quarters is pressing ourselves about, okay, what's the path to do better than 6% to 8%. So I'm going to talk a little bit about that before turning it over to Andrew – I mean to Matt. What it requires is continued momentum across each of the dimensions. So it requires to convert what we've been selling which is higher than what we've been installing, so convert that into installs. So if you compare our last three quarters average of $8.4 million of bookings to our recent installs of $8.1 million that would imply if you get a $0.3 million lift from just you know seeing that place way through.

It requires decreasing the churn to that $5.5 million level or better which we think is a very reasonable target that would get you kind of a big step of the way there and that requires selling more, so requires selling at a level of about $9.3 million on a quarter-in, quarter-out basis. So, although we sold more than that in this most recent quarter, we've kind of got to do that every quarter in order to have the momentum to go further. If you do each of those three things, you also then turn into 8% to 10% growth company and that's really where, we're gearing up our execution to do.

We'll talk a little bit more about the revenue retention and you know why we believe that somewhere in the $5.5 million is a reasonable expectation is, as we've broken down kind of our churn, what we're seeing is we have a very strong kind of a reputation with nearly all of our customers, with always some exceptions, but our reputation for service and delivery and how we do business is very strong that's evidenced in the Net Promoter Score, but it is also evidenced as we deep – dive deeper and deeper into the churn in revenue retention analysis.

We also thought – as we look at analysis, see that a lot of the sources of churn, I think that are addressable, they are not inevitable. In that, examples of inevitable churn are thing such as a company goes out of business or companies insourcing on to their own network because they're going through a grooming exercise. Or even a decrease in price, you can consider that something that is you know – they have already addressed by keeping the revenue, but you have to write down the revenue. So those are the examples of, hey, those are what they are there's probably not much you could have done about it.

But what we're seeing is there's a lots of examples where a tighter better engagement with the customer including engagement on revenue retention and then making sure if there's any challenges that we're facing, such as a competitor coming in and trying to take the business or if there has been some service issues resolving them as quickly as possible and communicating real well or just being engaged with the customer that you know a lot can be affected by just dialing in better in a very basic area. It sounds straightforward, but we think that there's a lot of lower hanging fruit.

That's available to us as we have now put behind us some of the larger acquisitions over the last a year or two years, some of the reorganizations that took place and getting some more systematic approach around ensuring that we have real strong engagement with the customers who have material amounts of revenue with us. So we see that is the low-hanging fruit, the opportunity to affect churn despite – a lot of other things that can be done and are being done, but we think a little bit of, a little bit more focus in the right areas will go a long way.

And then lastly, we think from a booking standpoint, we have a lot of upside as well. As I said earlier, we still have a lot of newness within the sales investments that we've made both in terms of people, on the sales side of house but also in the business development functions and also just the newness to Zayo itself. So as that plays its way through, as we continue our focus and other sales channels such as Inside Sales, the Agent/Indirect Channels and then the momentum we're having with Global Reach. All those together with the Biz Dev we think are going to provide us sales momentum so that we can continue to establish new record quarters as we march forward in the future.

And with that, I'll turn over to our CFO, Matt.

Matt Steinfort - Zayo Group Holdings, Inc.

Thank you, Dan. I'm going to start with just some highlights on the strong execution we've had on the high-quality tuck-in acquisitions that we've recently done. This quarter we closed the Spread Networks and Optic Zoo acquisitions, both of which are good examples of our tuck-in acquisitions strategy, both of these deals add significant fiber to our network. In the case Spread Networks [Technical Difficulty] (18:12-18:18) Networks, we added a key low-latency, high-fiber count route between Chicago and New York.

In the two months since close, we are already seeing significant inbound demand from this route from our large customer base and we're leveraging the uniqueness of this route for broader low-latency applications and customer deals.

With Optic Zoo, we added a deep metro footprint – fiber footprint in an existing and attractive market in Vancouver and we're seeing the advantages of deploying a larger scale sales force against that – against that asset.

In addition, two weeks ago, we also closed on the acquisition of Neutral Path Networks, providing the unique, high-count fiber route between Minneapolis and Omaha. Consistent with our well-established process, we've rapidly integrated this acquisition and our sales people are already selling this route as part of Zayo's network through the Tranzact platform.

Moving on to our key priorities in some of the progress that we've made. We continue to make progress on with the kind of the highest priorities that we have both in terms of the Allstream separation and REIT evaluation. On Allstream, we are approximately 90% complete with the operational separation of Allstream. As a reminder, we had expected to complete the internal separation by June 30, although actual full separation will depend on market timing and other factors.

Also as you know, we issued a press release this afternoon detailing our progress on the analysis of the potential REIT conversion. Based on our findings to-date, we believe it is likely that they will have alternatives that would enable REIT conversion and, as a result, have started the next phase of evaluation and preparation.

We've begun a direct dialogue with the IRS in an effort to obtain clarity and support for our position, which may include seeking a private letter ruling from the IRS. We've begun to execute the organizational changes that are required to operate as a REIT, including the realignment of the business segments, to clearly delineate the leasing of network assets from ancillary services and the separation and potential divestiture of Allstream.

Finally, we are assessing what changes may be required to our financial system and our reporting in connection with any potential conversion to the REIT.

As I just mentioned, we are realigning our business segments effective for the June quarter. The realignment includes the movement of Ethernet Transport from the Enterprise segment into the Transport segment. This change was made to align all point-to-point private network solutions within one segment – the Transport segment and to better align the natural product lifecycle of SONET customers which has been in the Transport business with the Ethernet Services under one business owner in the Transport business segment.

On page 29, we have results by segment. Communications Infrastructure revenue of $531.7 million represented 82% of Zayo's revenues, while CI EBITDA of $294.1 million represented 92% of consolidated EBITDA. Over 65% of Communications EBITDA came from our Fiber and Colocation segments.

Turning to our reported financials, Zayo Group revenue was $649.4 million for the quarter with EBITDA of $319.6 million. Quarter-over-quarter growth rates in both revenue and EBITDA were impacted by several factors, primarily last quarter Ciber bankruptcy settlement, which is previously disclosed added approximately $7 million in revenue and $5 million in EBITDA to the December quarter results, along with Allstream revenue and EBITDA declines, and a few other items that I'll talk through in the following slide.

As Dan mentioned, our EBITDA was flat and on an absolute basis on the CI side, if you break those down into the components on slide 31, we show the bridge between December 2017 and March 2018 reported EBITDA for Communications Infrastructure. For the December quarter, we reported $300 million in CI EBITDA. As we've previously disclosed this included the $5 million one-time benefit from the bankruptcy settlement from Ciber. It also included a $1.9 million positive impact from the seasonal benefit that you get every fourth quarter relative to PTO usage and an additional $2.5 million of additional one-time benefit, some of which were related to the acquisitions that as we work through those costs. Building from this base EBITDA $290.6 million in the March quarter, we saw a $3 million headwind due to the normal first calendar quarter increase in payroll and property taxes.

We then benefited from $6.7 million in revenue growth and added $0.9 million of acquired EBITDA from the acquisitions of Spread and OZ [Optic Zoo] Networks. Net of the $1.1 million and all other items which were negative, which included the cost of the organic revenue growth, we reported $294.1 million in CI EBITDA for the March quarter.

Our balance sheet on slide 32 remains very strong with the gross leverage ratio of 4.6 times. We remain within our target leverage ratio of three to five times adjusted EBITDA. During the quarter, we successfully priced $150 million term loan add-on to fund the previously discussed acquisitions. And finally, our stock-based compensation was $19 million for the quarter at 0.2% dilution.

With that, we will start the question-and-answer portion of the call. Operator, will you please begin?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. Our first question will come from Michael Rollins with Citi Investment Research. Please go ahead.

Michael I. Rollins - Citigroup Global Markets, Inc.

Hi. Thanks for taking the questions. Two, if I could. You know, first, Dan, you mentioned the opportunity to speak more about Andrew's departure. If you can maybe give us some additional color on what happened and your go-forward plan for the team?

And then secondly, if you'd talk a little bit more about the bookings. In the quarter, you had some strength from, I think you mentioned a pull forward of some of the E-Rate and the incremental business from the national wireless carrier. How should we think about what 1Q or calendar 1Q looked like on a normalized basis and the ramp that you have for the rest of the year? Thanks.

Dan P. Caruso - Zayo Group Holdings, Inc.

Sure. On your second question, every quarter, there are portions of the quarter given the nature of our business, that there's deals that are more material than others. I mean, that's kind of – a quarter when there's none of those is a quarter where the number will be very different, but every quarter those kind of those deals. So what we're talking about – the ones we are talking about this quarter will be different than ones we talked about last December quarter or the quarter before that. So although you're right, the ones we're talking about this quarter may not repeat themselves in the quarter we're in right now, but there's other things that will.

So we don't – we're not prescriptive about what we think bookings will be in this – in the quarter that we're currently in or in subsequent quarter you never know for certain till you get toward the end of the quarter. So all I would say is, I'll repeat what I said multiple times during the presentation, we feel like we have lots of momentum. We think we've been demonstrating that through kind of quarter-in, quarter-out bookings, and we also believe that a lot of the investment that we made is still settling in, so we don't think that the results that we've been displaying over the last couple, three quarters are an outcome of the investments. We think the investments we've been making and the fine tuning of it will lead to stronger and more sustainable results in the future, exactly where we're going to come in this quarter or next, that – couldn't tell you, but we like the momentum.

Relative to Andrew, there is not a lot more that I think is appropriate to say there. I wanted to go through the presentation first. As you could see and as I said out of the gate, the performance of the business is strong and the momentum is strong the – so this isn't related to either of those. It isn't related to what's going on in the business itself. There's – I think, why Andrew decided to resign is something that we'll leave to Andrew to have deeper conversations on. But Andrew was someone who's a friend of ours, someone who's – we all respect, someone who we'd like things to have worked out differently. I think part of your question was what do we expect to happen from here? We don't see a lot of change in addition to what just happened here, we're just kind of continuing on with the current course.

Michael I. Rollins - Citigroup Global Markets, Inc.

Thanks very much.

Operator

Our next question is from Amir Rozwadowski with Barclays. Please go ahead.

Amir Rozwadowski - Barclays Capital, Inc.

Thank you very much. A couple of questions, if I may. Just to clarify on the REIT because there was some language that provided some uncertainty around the potential timing, but it sounds like, Matt, from your standpoint that the goal is to move forward with this process and create that optionality for you folks. Is that the right assessment that we should take away here?

Matt Steinfort - Zayo Group Holdings, Inc.

Yeah. That's absolutely the right assessment, Amir. We are working aggressively towards having that option value. And as we communicated in the press release and in our comments, we made some very good tangible steps forward and our level of optimism, viability of that option is only increasing. The comment you're likely referring to is the multiple year comment at the tail end of the press release. And that's – when you insert the IRS into a process, you have an inherent level of uncertainty that we just can't control or predict.

And then, secondly, if you then recall the amount of time it took Equinix to convert from the time that they decided to convert and then factor in the fact that we have a large amount of NOLs that carry us forward. We're just cautioning that if we did conclude that we wanted to, it could still be a while before that would actually take effect. But, no, you shouldn't read any uncertainty or any hesitancy in terms of our commitment and our aggressiveness towards making that an option.

Amir Rozwadowski - Barclays Capital, Inc.

Thanks very much. And then going back to the question around Andrew, if we think about a lot of the changes that have taken place over the last year, the revamp of the sales force, the verticalization efforts that you guys have put into place. Are there any potential risks of disruption to that, and the potential impact that could have on the bookings trajectory as he transitions out of that position?

Dan P. Caruso - Zayo Group Holdings, Inc.

I don't see any interruptions to that. The steps we were taking relative to the verticals, that began before Andrew really got here and got going. That wasn't a result of Andrew being a part of it. Certainly the execution, Andrew played a big role in but the strategy of building up the sales force to the level it is now, the work we're doing on the Fiber Biz Dev, that began a year-and-a-half ago, picked up a lot of traction over the last year.

We're doing – one thing we haven't talked a lot about is the ramping up of the Inside Sales function which is going really well, and it's starting to become more of a contributor as well as the ramping – as well as something that's relatively newer for us and that is a more intense focus around the channel partner community, it's always been a part of our sales, but it's not in a part that we put a lot of strategic focus on and fill our Chief Revenue Officer is hitting – is focusing on each of those areas including kind of expanding the focus to the channel partner area.

So all of the investments we've been making, all of the focus we've been putting in place, the methodology, the fact that most of that's in place right now, although there continues to be upside investment opportunities as we talked about in the Fiber Biz Dev as an example and as I am sharing right now in the channel partner area. But all – the course that we're on is a good course, it's working, it's producing the results, a lot of the hard work is behind us and the fruits of that labor, hopefully, are right in front of us.

Amir Rozwadowski - Barclays Capital, Inc.

Thanks very much for the incremental color.

Operator

And our next question comes from Colby Synesael with Cowen and Company. Please go ahead.

Colby Synesael - Cowen and Company

Great. Thank you. I apologize for harping on the REIT component, but I just had a few more questions on that. So I guess first off is there any milestones that we should be looking for. I mean when we think of the last days you suggested by, I think, June 30 of this year that we would have some type of decision made by the company and obviously you're announcing that today. I was wondering if there's any, what's the next milestone we should be looking for?

And then, secondly, just you mentioned Equinix, I recall the time the cost to convert. If I'm not mistaken was fairly significant in terms of how much they spend and the efforts that they had to make to actually make that happen. I'm wondering if you have any thoughts on what that might be for you. I appreciate that it's early, but if this can be a small and fairly straightforward transition or something that could be lengthy and complicated. And then, secondly, as it relates to EBITDA just in light of the situation that we're in this quarter. Is there anything either to revenue or EBITDA that's one-time in this calendar first quarter results that we should be aware of when trying to model off for the calendar second quarter? Thank you.

Matt Steinfort - Zayo Group Holdings, Inc.

Yeah. Thanks Colby. In terms of milestones, I mean again we're actively in conversation with the IRS and there is still some chance that we would be pursuing a PLR. And so at some point, I would assume over the coming quarters we would be able to provide an update on whether or not that's something we're going to do and the timing then would be relatively quickly thereafter if we were to pursue that path that we'd be able to communicate that we had gone down that next step with the IRS. So, I would say that that would be the most notable or noticeable of the milestones. The rest will be, I think for most of you more mundane and it will be updates for me on our progress around systems or reporting or something along those lines, but I'd say that the most material next step would certainly be additional color on the IRS.

From a cost standpoint, yeah and we've actually got, I didn't call it out, I know that other folks have reported that we may do so going forward as it becomes more material, but we have been investing a fair bit in the REIT analysis with law firms and tax and others and that's not counting just internal resources. And I expect that to ramp in the coming quarters as we move more into the operational and administrative aspect of preparing for that option. So, we'll follow up with additional color as that cost becomes more material and provides more clarity there.

Dan P. Caruso - Zayo Group Holdings, Inc.

Let me just jump in on that for a minute, take the next part of the question. I wasn't real close to the journey that Equinix went to. My guess is that the journey a lot of companies they have to go through involves a lot of reorganization in the business, reorganization of revenue and costs in order to align it to a REIT-type model. Maybe by luck or maybe by design, the way we're organized already is largely kind of consistent with how you would view kind of readable businesses in that for example our Fiber Solutions business is an intact business unit and we already have command and control over the assets and the cost structure and when other business units used the Fiber, how much they have to pay internally to lease the fiber from the Fiber unit, same is true with Colo, same is true with Transport, so I think a lot of the real expensive and time-consuming work, has to do with internally organizing your business and your financials. A lot of that's already kind of exists and is in place within Zayo relative to I think most journeys companies have to go through.

Matt Steinfort - Zayo Group Holdings, Inc.

Then, Colby, your – the second part of your question was around one-timers relative to this quarter and I think to think about and in fact it's the opposite of that, which is there really weren't very many one timers in this quarter and there's always something, there's always you know some minor positive or negative impact and in this quarter, there really – there really wasn't other than the, you know, the normal first quarter headwind around the increase in payroll taxes and the annual increase in property tax, which we called out and which is part of what contributed to the quarter-over-quarter flatness as we had a number of those one timers in the December quarter and not – not a really anything in the March quarter to offset that, which is why we wanted to make it clear that the – the walk was not a result of the increase in our cost, or an increase in the – or a decrease in the profitability of the business – the incremental business. It was – it was more just a seasonal – a seasonal effect and the – you know the fact that we didn't have a lot of offsetting one timers in the subsequent quarter.

Colby Synesael - Cowen and Company

Great. Thank you.

Operator

Our next question is from John Hodulik with UBS. Please go ahead.

John C. Hodulik - UBS Securities LLC

Sure. A couple of questions, if I could. First of all, you know in your prepared remarks, you talked about the momentum in Fiber Solutions being particularly strong, is it – can you talk about sort of what verticals or sort of what areas are driving that and you know do you have any sort of visibility on that continuing. And then, there's a couple of questions on Allstream, first of all, can you give us a sort of some color on sort of why we're seeing the sort of revenue and EBITDA trends there deteriorate and I know you've talked about some – some you know some possible sort of solutions there. I mean you know what are the really the options and when can we expect some sort of resolution to Allstream? Thanks.

Dan P. Caruso - Zayo Group Holdings, Inc.

All right. On the Fiber Solutions business, the verticals that contributed to that are multiple in nature and we see a lot of additional opportunity in that business, certainly the momentum as evidenced by the bookings being higher than the installs that's kind of a natural momentum whenever you see that that implies your installs are likely to be higher in the future at least near-term, than in the past because you have more kind of pipeline to work against. So that's obviously positive. But beyond that, the verticals include the content webscale companies; they include data center-type companies; they include school districts, hospitals; they include financial – large financial companies we see a lot of business with the major financial institutions who are kind of redoing their networks over time with what data center strategies. Several examples of Fiber Solution deals being done. A lot of it's really across a lot of different areas. I mean it's you know the way the market is evolving where more companies of many different verticals be more command and control over their private networks means that the market is kind of moving toward infrastructure.

So there's verticals where infrastructure would be – of the sorts of dark fiber would not have been relevant by five, six, seven years ago. But are very relevant today, because of the cloud, because of kind of data center strategies, and also because of innovative new business opportunities. So like an example would be kind of traditional retail, if you think about a traditional retail company, you wouldn't have really viewed them as a material dark fiber opportunity five years ago. We see a lot of activity in recent quarters that's kind of household name traditional retail companies who like their – you know their competitors who grew up through the e-commerce ranks they have lots of big data applications, data analytics from data centers, needed fast response times with their customers and with their trading partners. And therefore, they need very robust fiber networks and that's just one example, but across most verticals the opportunity to provide kind of dedicated Fiber Solutions often live but where the Fiber's dedicated to the customer that opportunity is growing across lots of dimensions.

When we say we're investing more in Fiber Biz Dev, the challenge that we see is that there's a lot more opportunity out there than we're getting our arms around because we need to get more kind of intimate engagements in each of our kind of micro geographies so that we're helping our broader sales team understand and execute against the very local opportunities that exists even in Tier-2, Tier-3 markets. And I don't think I mentioned the wireless carriers, wireless carriers and cable TV companies are also kind of prime examples of dark fiber opportunities or Fiber Solution opportunities.

Matt Steinfort - Zayo Group Holdings, Inc.

And I can take the second question around Allstream. So the trends around – the recent trends around revenue and EBITDA decline were driven in a large part of this last quarter from a single large Canadian carrier that had hosting services with Allstream that churned, and that was about half of the revenue decline. We don't anticipate that to be a – that revenue would decline at that same pace on a going-forward basis and as we continue to manage the cash flow of that business would expect to still have good performance there. The Allstream's – I'm sorry, the options around Allstream. The first step is we had articulated in prior quarters was to complete the internal separation, to give us the ability to then formally separate Allstream in kind of one of two ways at different ends of the spectrum.

On one end of the spectrum, we could separate it legally which we've done but then lever it up and take a minority ownership position in that business such that we wouldn't have to consolidate it into our overall financials but we would still benefit to a lesser degree. But we would benefit from the cash flows of that business. And as we articulated, that's a good fallback strategy for us as we would control our own destiny and it's depending on the strategic landscape and potential acquirers. We could – we could execute against that and own our own destiny. The other end of the spectrum is to consider the sale of the Allstream business. In whole or potentially in part, but to a strategic or potentially to an infrastructure funder or someone else. Our goal in getting the complete internal separation is to have the ability to then go focus on that next step.

And as I indicated in my comments, we're 90% done with the internal work. And then you say what's in that 10%. There are certain transition services agreement like activities that where we're still relying potentially on say Allstream to do a portion of the billing on services that we had acquired from ELI that need to be migrated to the Zayo billing system. And we expect those to be resolved in the coming weeks and months. So I expect that that you know – so I expect that that you know that the beginning of having conversations will happen you know potentially at the end of this quarter beginning of next. The timing of an outcome is completely dependent on market factors and the type of reception we get relative to the assets.

John C. Hodulik - UBS Securities LLC

All right. Thanks, guys.

Operator

And our next question is from Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery - Morgan Stanley & Co. LLC

Great. Thank you very much. Dan, on the E-Rate, a strong quarter this quarter, can you just talk a little bit about what was it that drove your success versus a year ago? What, is that internal changes and talk about I think you said you expect more, but talk about the seasonality and how it should flow through the rest of the year?

And then, Matt, just to come back to the REIT, are you saying now that you have agreed or you've decided on the path that is optimal for conversion on your – or talking to the IRS about whether you need a PLR to execute that path or are you still evaluating several different ways to get there? Thanks.

Dan P. Caruso - Zayo Group Holdings, Inc.

Okay. On the E-Rate, so what drove success, well first of all, we could have done more and so although we're very pleased with the outcome, we also realized that as we think about the next year's season, there is probably – there's some I'm going to say worked well, could probably work well at a larger scale across the board. So we're enthusiastic that this was a great step, the right direction, but with a lot of additional potential over time. There are multiple factors that contributed to success; one of the factors is that, fiber itself is more of an E-Rateable product now than it was in the recent past. So that wasn't dark fiber-type solutions didn't qualify for E-Rate in the past, like they do today. So that was certainly helpful.

The other thing that was very helpful is what we spent a lot of time talking about already and that is our Fiber Solutions regions and the Biz Dev functions underneath those regions. We're well more equipped to know at a kind of micro market level the dynamics that are taking place around our network, where our network matches up to kind of local opportunities and how to work with the ecosystem that is tuned into those opportunities. So, we have some good partners that we've worked with, who are long-term kind of experts in the E-Rate which, is a very specialized field, as well as some kind of customers who focus on E-Rate, but aren't fiber-rich customers. So a lot of good things came together to make that happen, but also the realization that wow, if we were to hit on all cylinders, it could have been twice as big type opportunity. So that's encouraging.

As far as what to expect in subsequent quarters, the first quarter this year, is kind of a more special quarter, similar to how second quarter of last year was. But there's still add-on opportunities, so some of the opportunities did spill into the second quarter, but then there's also the opportunities that other companies won. So other companies were a (46:07) provider, but in many cases the ones who have won other ones do not have significant underlying fiber network in areas where we do have significant underlying fiber network. So through working with those E-Rate specialists on deals that they were awarded either during first quarter or second quarter, we think we can get add-on business from them by putting our fiber network to work. So I think you won't see something repeat itself like first quarter, but I think you will see a steady amount of additional revenue as we continue to focus on that public sector.

Simon Flannery - Morgan Stanley & Co. LLC

Right.

Matt Steinfort - Zayo Group Holdings, Inc.

And Simon, your second question was around the REIT and have we chosen a path? We have. We have a path that we believe would be our preference and we feel like we have a strong position. It's not the only path. And so our conversation with the IRS is again trying to get alignment that the path that we are articulating is something that they would be comfortable with and then trying to understand if that requires a PLR for us to proceed down that avenue. If for some reason the optimal path that we have doesn't work for the IRS, there are other avenues for us that candidly, require a bit more effort on our part. And so we would address that should we get there. But again my – I'm optimistic about the progress that we've made and I look forward to continued discussions with the IRS in the coming weeks and months.

Simon Flannery - Morgan Stanley & Co. LLC

But just to be clear, it's possible that you might come back to us in six months and say, okay, the IRS has blessed this, they don't need a PLR, so we're – we have our optionality.

Matt Steinfort - Zayo Group Holdings, Inc.

That is certainly a scenario, certainly. I think the – again, I want to defer a bit of trying to put words in the IRS's mouth. I feel like we have a strong position, that based on the experts that we're working with we feel is defensible. And our goal would be to get the IRS to agree and if that agreement requires getting a PLR, then that's something that we would certainly do.

Simon Flannery - Morgan Stanley & Co. LLC

Great. Thank you.

Operator

And our next question is from Jonathan Atkin with RBC. Please go ahead.

Jonathan Atkin - RBC Capital Markets LLC

Thanks. A couple fairly quick ones, I think. So on the executive departure, is Andrew under non-compete or not? And then, I was wondering on kind of the M&A front, if you could sort of refresh us on any interest you have on the 24 city pair (48:51) divestitures as part of the CenturyLink Level 3 how that may or may not fit into your plans. And then, related I guess to M&A to some extent, there's been a slew of foreign infrastructure funds investing in U.S. fiber assets lately, and I just sort of wondered kind of your thoughts on valuation and kind of implications for your company? Thank you.

Dan P. Caruso - Zayo Group Holdings, Inc.

Great. Thanks. So the question about Andrew being under a non-compete, I'm getting notes from my attorney, let's see. He has a non-solicit of employees, customers, and vendors which is very typical for kind of our executive team, but not an explicit non-compete.

And the other question, we won't comment on the – on M&A that you're asking about a particular one that's kind of a unique situation. But just out of a common practice, we prefer not to be – to provide comments about our thinking about specific opportunities. And I've...

Jonathan Atkin - RBC Capital Markets LLC

Okay.

Dan P. Caruso - Zayo Group Holdings, Inc.

...got some private valuation multiples. What we're focused on is value creation. As you guys know, it's kind of a way we not just think about the business like I think all responsible companies do. But also how to operationalize that in the form of how to – how to measure whether or not you're gaining equity value over time. It's not to be all and all measurement. The growth of the business matters a lot in terms of whether you're creating equity value. But to keep your EBITDA multiple constant, you get some sense of value creation by using that to determine whether or not whatever your multiple is, whether you're gaining an equity value over time or not and at sort of what pace. So we focus a lot on what's under our control. Are we growing equity value, are we growing the business itself. We certainly pay attention to what multiples our properties trade at and try to get insight as to how people think about valuation more broadly.

I also focus very much on at the end of the day our business is worth, what the cash flows really are going to be. So we try to take all of our decisions with that in mind, how that translates into what an appropriate private equity valuation is of a company that an infrastructure firm buys is, I think there's – you know that's – you know a broader conversation that I think is a little bit less relevant to how we make decisions and how we think about whether or not we're being successful in our quest to create equity value.

Jonathan Atkin - RBC Capital Markets LLC

Thank you. And then – and then in the presentation slide 22, you talked about churn you know roughly half of churn been addressable and I wondered if you could maybe drill down just a little bit on some of the opportunities there? What sort of product sets or verticals does that apply? Is it kind of low-hanging fruit there for certain parts of your business above others? Thank you.

Dan P. Caruso - Zayo Group Holdings, Inc.

Yeah, absolutely. I mean, there's a lot of analysis of churn that you know that you know we look at and that we do and frankly that we need to do more of. So we've – we've turned up kind of our intensity around trying to get a better quantitative understanding of churn across more dimensions than just what caused the churn, but what related factors like, okay yeah you might have lost something to a competitor but why did you lose that to the competitor, why did you lose that price. You know how and then that actually into things like how engaged you're with your customer and how long did you have engagement and what was your Net Promoter Score. So you start to triangulate across many factors. What product was it? How did that product work? So you try to take a – not just take data but try to create data, create data in the form of how do you know how do you quantify whether or not you are properly engaged with the customer because if you could quantify it, then you could – it's easier to do kind of assessments of what the correlations were.

So we have a body work that's kind of you know we lean to an increasingly better understanding of kind of what we can do to better retain revenue. But I think there's a very simple and there is this message I passed earlier, we looked at study, contemplated data, there's a fair amount of the churn that is very correlated to how deeply engaged we are with the customers. If you're deeply engaged with your customers, even if a competitor comes along, you know, even if you know the market dynamic is such that you know their needs are changing, they're upgrading into a higher speed solution or a different technology or trying to get different price point. If you're heavily engaged and you have been for a while and your engagement includes revenue retention as kind of a core focus, not just selling them more, but engaged around revenue retention, there's probably a lot that is avoidable. So in our case, for good or for bad, we believe we have a lot of opportunity that's lower hanging fruit because if we get our engagement model, very dialed in which we're doing, we get it very dialed in, we think that alone could have a material impact on churn, that will see come down.

Now there's things that it just can't affect. As I said earlier, there's things like you know two carriers kind of combined together and that's been part of our history from the day we did our first acquisition. You know, some of those are just going to happen, they've always been in our embedded base. For at least the next two or three years, they'll continue to be in our embedded base. But as the consolidation industry kind of plays out you know two or three years now, that's going to be less and less of a factor, relative to how it's been in the last five, six, eight years. So that's kind of a longer term upside. But the good news is our service you know we get constant feedback on providing really good service for customers. And that's the uniqueness of what we're able to provide. The fact that we have a lot of our own network that we've put to work the attributes that are much harder to fix if you didn't have them those are not were the sorts of churn is coming from in our case, it's really just getting more dialed in on engagement and then you just see the churn come down a little bit and we're just talking about a relatively modest amount of improvement that we have a churn problem that we're looking to solve but we think that we can get to a modestly better churn number just by dialing in our execution.

Jonathan Atkin - RBC Capital Markets LLC

Thank you.

Operator

Our next question comes from Philip Cusick with JPMorgan. Please go ahead.

Philip A. Cusick - JPMorgan Securities LLC

Hey guys, thanks. A couple of things. First, a follow-up on the E-Rate discussion we've heard from a number of companies that E-Rate was weighted to the March quarter this year rather than June. Can you help us by arranging the E-Rate impact on bookings this quarter and what it contributed to June last year?

Dan P. Caruso - Zayo Group Holdings, Inc.

Yeah. I think there's a way to kind of see that not necessarily with precision but from the numbers that we reported. So if you look at our public vertical recognizing that it's growing in general, so I'm flipping to the page – give me one second here. So it's page 10 of the deck and you look at the June quarter last year, all right, of 2017 and you look at the amount of bookings that came from the public channel, you could see it was a bigger number than the prior quarter or the subsequent quarter. And then you see that pattern again get in the March quarter in a more pronounced way but again a stronger quarter.

So this is kind of a direct indication of what you've been hearing from others and from us that last year it was more constrained in the June quarter. This year was more constrained in the first quarter, but there are additional opportunities that spill into subsequent quarters, not just direct opportunities related to E-Rate wins that we'll have but also in our case which is – more true in our case than most others opportunities to put our network to work supporting other E-Rate winners because of the network that we have that's relevant to you.

Philip A. Cusick - JPMorgan Securities LLC

Great. Thank you. And then second, as you work on converting to REIT, any change in thinking on how you would look at what goes into an AFFO number and what that number looks like, if we include – excluded Allstream?

Dan P. Caruso - Zayo Group Holdings, Inc.

Yes, so that's – that's something we'll probably follow up with more precision on in the subsequent quarter, but it certainly changes the way you think about the – you think about the reported AFFO. I'd like to take that in more detail in the subsequent call.

Philip A. Cusick - JPMorgan Securities LLC

Okay. Thanks, Dan.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Dan Caruso, Chairman and CEO, for any closing remarks.

Dan P. Caruso - Zayo Group Holdings, Inc.

Yeah. Well, thank you all for bearing with us. We know there was a lot of information we presented both leading up to the call and during the call itself. You know as you can see from everything we went through there's just a lot of momentum in the business, momentum on the booking side, momentum on gross installs and net installs and cash flow itself you know on revenue growth. So pretty much in all dimensions there's reasons to feel good about, both what we did and the trajectory that we're on. You know obviously from an EBITDA standpoint, you know that was the one area that wasn't as strong as everything else in here. But you know I think with explanation what happened there you could see that the revenue growth that we're having is turning into EBITDA growth. You know this quarter just like it has in prior quarters once you kind of work your way through some of the natural noise that we have in the system.

So, we feel good about where we're at. We feel really good about all the investments that we made and the fact that a lot of them, although our results have been better quarter-over-quarter for a number of quarters. We particularly feel good that a lot of the investments that we made have not yet begun to contribute fully to these results, which implies to us that we expect more good to come in the future. So appreciate your time, and look forward to follow-up conversations.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.